What Happens To Taxes When I Sell An Inherited Stock

Yes, you pay taxes on the sale, but only on the gain since the original owner’s date of death - not the gain from when they originally bought it. This “step-up in basis” usually drastically reduces your taxable profit, and you automatically qualify for long-term capital gains rates regardless of how quickly you sell.

How inherited stock taxes get a step-up in basis

When you inherit a stock, the IRS pretends the original purchase price never happened. Instead, the cost basis, the number you subtract from the sale price to calculate profit, is adjusted to the fair market value on the date of the original owner’s death. This wipes out all the unrealized gains that accumulated during their lifetime. The step-up in basis is the single biggest tax break in estate planning because it erases decades of appreciation from the tax man’s view. You don’t need to do anything special to claim it; the brokerage handling the estate or the executor typically reports the date-of-death value on the final inventory, and you use that figure on your own return.

Why you always get long-term treatment

Normally, selling an asset you’ve owned for less than a year means paying ordinary income tax rates, which can be as high as 37% plus state taxes. But inherited property is treated differently under IRS rules. The law deems you to have held the asset for more than one year, no matter how many minutes pass between the date of death and your sale. This means you automatically qualify for long-term capital gains rates, which fall into brackets set annually by the IRS and depend on your total taxable income for the year. Even if you sell the stock the same day the estate settles, you’re not hit with short-term ordinary income rates. This is a huge advantage because it can cut your federal tax bill by nearly half in the highest brackets.

When you might still owe significant tax

The step-up only protects you from gains that existed before the date of death. If the stock rises in value after that date, the new appreciation is your responsibility. The tax bill depends on your income bracket. You can’t avoid the tax by holding longer, either; selling a year later just means more appreciation is taxable. The only way to minimize this is to sell quickly after the death, locking in a smaller post-death gain, or to offset it with capital losses from other investments you own.

Finding the exact value on date of death

You can’t just guess the date-of-death price. The IRS expects a defensible number. The simplest method is to look up the historical daily closing price on a financial website like Yahoo Finance or Google Finance, just enter the ticker symbol, choose “historical data,” and find the trading day closest to the date of death. If the decedent died on a weekend or holiday, use the trading day immediately before. For mutual funds, the net asset value (NAV) on that date is published. If the estate went through probate, the executor’s inventory filed with the court will list the exact value used for estate tax purposes, that’s the same number you should use. For a trust that wasn’t probated, the trustee’s accounting will show it. Keep a screenshot or printout of the price quote, because if the IRS ever questions your number, you’ll need to prove it. Also note that if the executor chose an alternate valuation date (six months after death) for estate tax purposes, you generally must use that same date’s value for your basis, so check the estate documents before filing.

Frequently Asked Questions

What if the stock went down after the date of death?

Then you have a capital loss, not a gain. You can sell the stock, realize the loss, and use it to offset other capital gains or up to the annual ordinary income offset limit set by the IRS per year.

Do I pay state taxes on inherited stock sales?

Yes, if your state has an income tax. Some states tax capital gains at the same rate as ordinary income, while others like California tax them as regular income. A few states, like Florida and Texas, have no state income tax at all, so you’d only owe federal tax.

Can I gift inherited stock to a family member to avoid the tax?

No. Gifting transfers your basis to the recipient, so they’d inherit your low basis and owe tax on the full gain when they sell. You’d also face gift tax reporting if the value exceeds the annual exclusion amount set by the IRS for the tax year.

What if I never receive a 1099-B for the sale?

Brokerages are required to send you a 1099-B for any sale, but if you don’t get one, you still must report stock sales on your tax return. Use the trade confirmation from the brokerage and your own date-of-death basis calculation. The IRS cross-references sales, so omitting it can trigger a notice.

How do I handle the alternative minimum tax (AMT) on inherited stock?

AMT rarely applies to inherited stock because the step-up in basis eliminates most gains. However, if you exercise incentive stock options (ISOs) from the decedent’s estate, that can create an AMT preference item. Consult a tax professional if ISOs are involved, and for a broader understanding of how these rules fit into your overall financial picture, be sure to explore the topic of taxes on investments in Taxes on Investments: What to Know and How to Handle It.